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Stability, Coordination and Governance: Was a Treaty Such a Good Idea?

In the margins of the European Council meeting on 2 March, the leaders of twenty five European states formally signed the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (the SCG Treaty aka ‘Fiscal Compact’ Treaty). When compared with the rancour of the December European Council summit which saw the UK Prime Minister block a direct revision to the EU treaties, for President Van Rompuy– celebrating his re-election as European Council President and appointment as the new Euro Summit President – the Spring European Council was conducted in a “team spirit”. More importantly, for Commission President Barroso, the treaty signalled the “irreversibility” of the Euro and underpinned its credibility.

As with my earlier contribution on the European Stabilisation Mechanism (ESM) Treaty, I want to reflect on this turn to treaties as a response to the economic crisis. As is by now well known, the unwillingness of the UK government to negotiate a revision to the EU Treaties without obtaining certain ‘safeguards’ for its financial services sector prompted other EU states to turn to the vehicle of an international treaty to enshrine in law a ‘fiscal compact’ among participating states. In the end, the Czech Republic also decided that it would not participate, leaving it to the remaining 25 EU states to agree a treaty amongst themselves.

There is much that has already been, and will be, written on the SCG Treaty. The issue of the very legality of the Treaty has itself been discussed with UK MP Bill Cash succeeding in obtaining an emergency parliamentary debate on the issue. For the moment, there are three main issues I want to illustrate. The first is the necessity of treaty reform. The second is the consequence of bypassing the mechanisms and processes for EU treaty reform. The third is the role played by domestic constitutional requirements.

Was Treaty Reform Really Necessary?

Reforms to the EU’s economic governance have been trumpeted as the return of the Community Method to EU decision-making. Indeed, the adoption of the legislative package of reforms known as the ‘six pack’ – reforming the Stability and Growth Pact (SGP); extending surveillance to macroeconomic imbalances; creating new procedures for the enforcement of the SGP; creating minimum requirements for domestic budgetary frameworks – does indeed suggest a legislative response to the crisis. In which case, does the SCG Treaty do anything that could not have been done legislatively or indeed via existing treaty-based mechanisms? In a recent report, the House of Lords European Union Committee broadly comes to the view presented below that while there may be novelties in the SCG Treaty, there is little that imposes new obligations that could not have been achieved by other means. Paul Craig has given similar evidence to the UK House of Commons European Scrutiny Committee, albeit with reservations about the use of EU institutions to pursue the aims of the SCG Treaty.

Certainly as regards the ‘coordination’ aspect of the SCG Treaty, this is principally accommodated within the existing mechanism provided for under the EU treaties. The European Semester as the focus of economic policy coordination emerged without treaty change and is now given legal expression in amended Regulation 1466/97. As for the ‘governance’ aspects, long before the Eurogroup was given explicit legal recognition in the Lisbon Treaty it had operated as informal coordination device for Eurozone states. Even the European Council itself existed prior to its formalisation as a European Union institution. Treaty change was hardly necessary to create Euro Summits.

The centrepiece of the SCG Treaty, however, is the ‘stability’ that is apparently to be gained by a ‘balanced budget’ rule requiring national budgets to be ‘balanced or in surplus’. This rule is to be deemed satisfied if a country’s budgetary position is at its ‘medium-term objective’ (MTO) with a structural deficit of 0.5% GDP (with a concession to allow a 1.0% structural deficit if debt is less than 60% GDP). Deviation from the MTO is to give rise to an automatic correction mechanism. The Treaty is rather vague on the corrective mechanism noting merely that it is to be put in place at national level in line with common principles to be proposed by the Commission. Yet the definition of the country-specific MTO and the processes for surveillance of convergence towards the MTO are already governed by the amended SGP and its accompanying regulations. Substantively, any further changes could have been accommodated in legislation.

The novelty, therefore, is not so much that the SCG Treaty establishes a balanced budget rule but that Article 3(2) demands that this rule be enshrined in national law ‘through provisions of binding force and permanent character, preferably constitutional’ with the Court of Justice given jurisdiction to ensure that the rule is transposed domestically. For states participating in the Euro Pact Plus, there had already been an exhortation to translate EU fiscal rules into national rules but with a greater openness as to whether to use constitutional or legislative rules. Moreover, Article 2a of amended Regulation 1466/97 now obliges Member States to ensure respect for the MTO in their medium-term budgetary frameworks. Importantly, such frameworks are now also governed by Directive 2011/85 adopted as part of the six-pack legislative reforms. For states other than the UK, numerical fiscal rules are to be adopted at national level. Therefore, the issue had already been addressed by instruments other than a new treaty.

It is not unusual for states to have certain ‘fiscal rules’. When elected in 1997 the UK Labour government agreed such rules with a view to seeking economic credibility. Germany has gone further in its Schuldenbremse which creates a constitutional ‘debt brake’: a strategy which views constitutionalism as largely a matter of putting things beyond politics. It is this strategy which the SCG Treaty attempts to upload and download to the other Member States by enshrining the balanced budget rule in primary treaty law with a mirror image constitutional provision the preferred implementation strategy. The paradox, then, is that the triumphant return of the Community Method as an apparently legitimate mode of rule-making in matters of EU economic governance has been undermined somewhat by a form of constitutional fetishism that views ordinary legislative responses as somehow not enough.

As Alastair Darling’s memoir of the economic crisis reveals, it is at moments of crisis that politicians crave flexibility rather than ever-harder rules. Indeed, they are willing to trade political accountability for fiscal credibility. Leaving aside the disputed effectiveness of enshrining an MTO in any sort of rule, the difficulty in constitutionalising such a rule is either that the rule itself is permitted some flexibility of application – limiting its value as a rule let alone a constitutionalised rule – or the rule is broken – which undermines not just the rule but also the domestic constitution.

Bypassing the EU Treaty Revision Process

The classic model for the revision of EU treaties has been the Intergovernmental Conference (IGC). Beginning with the Charter of Fundamental Rights and then with the Constitutional Treaty, the EU has experimented with a more ‘constitutional’ treaty reform process in the form of a ‘Convention’ representing the interests of national executives, national parliaments, the European Commission and the European Parliament. While the success of this style of process as a means of garnering legitimacy for the EU is perhaps doubtful – after all the Constitutional Treaty project failed – the Lisbon Treaty adopts the Convention process together with a consequential IGC as the ‘ordinary revision procedure’ (Article 48(2) TEU).

Under Article 48(2) TEU proposals for treaty amendment are to be sent in the first instance to the Council which then transmits the formal proposal to the European Council. The national parliaments are also notified. In respect of the revisions which ultimately led to the SCG Treaty, this did not happen. As is suggested by the UK Minister for Europe in an appearance before the House of Lords Select Committee on the European Union, a political declaration was circulated to members of the European Council less than 48 hours in advance of the December European Council meeting. There was not, as such a formal proposal to amend the treaties for the European Council to consider or for a Member State to veto. It would have been open to the UK simply to have demanded that a formal proposal be made to the Council. This would at least have allowed time for consideration of the substance of the text and whether a treaty revision was actually desirable or even necessary. It would also have given national parliaments an opportunity to be notified and to express a view.

But in any event, even if an amendment had been formally proposed, the decision of the European Council is not to agree a substantive treaty text but merely to open the formal treaty revision process. Under the Lisbon Treaty, the normal course of events would demand that a Convention be convened followed by an IGC. With the consent of the EP, the Convention can be dispensed with if the extent of the proposed amendments does not justify it being convened. This would still leave substantive negotiations to take place within an IGC and any resulting treaty amendments would need domestic ratification. In this way, the UK did not so much veto a treaty amendment but instead vetoed the opening of a treaty revision process. Had it forced the process to have been formally opened it might have used that process either to negotiate treaty amendments it wanted or to use its acquiescence as a bargaining chip in order to see some of the legislative proposals that were causing it concern to be recast or kicked into the long grass. Yet it is clear that in the febrile political atmosphere at the end of a difficult year, political leaders wanted to be seen to be acting decisively and with urgency: not, perhaps, the best conditions for making revisions to treaties.

All of which is water under the bridge. Negotiation of the text of the SCG Treaty was left to the Eurogroup Working Group – itself a reconfiguration of the Economic and Finance Committee chaired by Thomas Wieser –reconstituted as an ad hoc working group with participation from a small number of MEPs and with the UK delegation as an observer. Although negotiated behind closed doors, regular leaks of draft texts posted on Twitter showed the evolution of the text.

Both in its origin and its negotiation, the SCG Treaty marks an important departure not just from the text of the ordinary revision procedure, but also from a constitutional spirit that sees process, substance and legitimacy as interlinked. This was less of a constitutional dialogue and more political tweeting.

The Shadow of Domestic Constitutional Requirements

As an international treaty, the SCG Treaty will require ratification among the participating states. This will pose questions for participating Member States as to the constitutional process to surround such ratification, including the need for a referendum on the issue. Significantly, on 28th February the Irish Taoiseach announced to the Dáil the intention of the Irish Government to hold a referendum on ratification of the SCG Treaty. President Sarkozy meanwhile has ruled out holding a referendum if re-elected to the French Presidency later this year. For other states – e.g. the Netherlands – the issue may be more one of whether governments can bring coalition partners on board for the necessary parliamentary approval.

However, there is something different about the SCG Treaty from a revision to the EU treaties. As we have seen before with ratification problems in Member States, the failure of one state to ratify an EU treaty prevents its entry into force. At the negotiation stage and indeed after, that veto or threat of veto, can be used to strengthen a Member State’s hand in extracting things it wants. Not so with the SCG Treaty in that its entry into force is conditional on ratification by twelve Eurozone states. In this way, failure to ratify the SCG Treaty does not prevent its entry into force for other states. Moreover, ratification of the SCG Treaty is a condition for the receipt of stabilisation assistance under the ESM Treaty. For a state that may wish to obtain financial assistance under the ESM, in principle, there is no option other than to ratify. That said, if the very purpose of all these measures is to secure the stability of the Euro, what exactly would the other EU states do if a country like Ireland were not to ratify the SCG Treaty but be in need of financial assistance? Could they, would they, simply refuse to assist?

As to whether the requirements of the UK European Union Act 2011 played into the negotiating strategy of the British Prime Minister – scuppering a revision to the EU treaties to avoid a domestic plebiscite – in written evidence to the House of Commons European Scrutiny Committee, Michael Dougan and Michael Gordon from Liverpool Law School suggest this is unlikely to have been significant. If – as is envisaged by Article 16 SCG Treaty – the provisions of the treaty are to be incorporated into the legal framework of the European Union within five years, then provided the UK agrees to a treaty revision – after all unanimity will still be required – the issue will be tested. However, given the discussion above, EU leaders might well seek to avoid the problem by seeking to incorporate the SCG Treaty via legislative means – if necessary also using provisions on ‘enhanced cooperation’. All of which might just beg the question whether the turn to an international treaty was really worth it in the first place.